CRL takes majority of Vital River to expand RMS business in China

Charles River Laboratories (CRL), the US-based provider of drug discovery and development services, has agreed to acquire 75% of Vital River, the “premier commercial provider” of research models and related services in China.

CRL expects to pay around US$27 million for the stake in Vital River, subject to certain closing adjustments.

The Chinese company, which has been producing and distributing Charles River’s research models in China for the last 10 years, with sites that reflect the design of CRL’s own facilities, will be majority-owned and controlled by Charles River. The deal includes an option for CRL to acquire the remaining 25% of Vital River at a later date.

The transaction as it stands is projected to add more than 1% to Charles River’s total net sales for 2013 on a full-year basis, and should be “slightly accretive” to 2013 earnings per share, CRL said.

Set standards

"We expect demand for research models in China to significantly increase over the next several years as drug development initiatives in academia, government and biopharmaceutical companies expand,” commented James Foster, chairman, president, and chief executive officer of Charles River Laboratories.

“Through our acquisition of Vital River, Charles River intends to set the standards for research models in China, the third-largest pharmaceutical market in the world, and play a leading role in this emerging opportunity,” Foster added.

CRL’s Research Models and Services (RMS) segment has generally proved the more buoyant side of the business in recent years compared with Preclinical Services (PCS), although the last couple of quarters have seen RMS revenues lose some momentum, due largely to unfavourable currency movements.

In October 2011, Charles River sold the assets of its in vivo pharmacology facility in Shanghai to ShangPharma Corporation, a China-based research and development outsourcing company.

CRL had been pursuing cost efficiencies in its underperforming Preclinical Services business and earlier that year had closed its PCS facility in China. In August 2010, the company caved into pressure from major shareholders and scrapped its planned US$1.6 billion acquisition of Chinese contract research organisation WuXi PharmaTech.

Targeted acquisitions

As CRL reported its third-quarter results, Foster said the company was “enhancing our position with strategic targeted acquisitions which expand our capabilities, such as Accugenix, or our global reach, as with our planned majority acquisition of Vital River”.

Charles River reinforced its Endotoxin and Microbial Detection (EMD) portfolio of products and services in late August by acquiring Accugenix, a US-based provider of current Good Manufacturing Practice-compliant contract microbial identification testing, for around US$17 million in cash.

Third-quarter results

The PCS segment again fared better in CRL’s latest set of results, with net sales from continuing operations rising by 5.7% over the third quarter of 2011, to US$112.2 million.

In the RMS segment net sales fell by 2.9% year on year, to US$166.5 million, in the quarter. Stripping out foreign exchange, RMS sales would have increased by 1.2%, Charles River noted.

Overall, CRL’s net sales from continuing operations for the third quarter came to US$278.7 million, an increase of 0.4% over the same quarter last year.

Operating income for the three months ended 29 September 2012 was 37.7 million, 1.6% higher than in the year-before quarter, and diluted earnings per share (EPS) from continuing operations were US$0.46, compared with US$0.37 per diluted share in the third quarter of 2011.

Ignoring special items, such as amortisation of intangible assets, severance costs and operating losses from PCS facilities in China and the US, third-quarter diluted EPS were up by 14.0% year on year to US$0.65 and ahead of the analyst consensus cited by Thomson Reuters, which was for Q3 EPS of US$0.62 on revenues of US$278.86 million.

Pivotal moment

Announcing the results, Foster commented: “We are experiencing a pivotal moment in time when global biopharmaceutical companies are reinventing the drug discovery and development model”.